If a company that sponsors your 401(k) plan goes bankrupt it can wreak financial havoc. When a company collapses, the assets of its 401(k) are supposed to be transferred to account holders promptly, however this wasn't the case for Penn Special Chemicals in Memphis.

EVERYONE with a 401(k) knows that bad investments and high fees can threaten their retirement. But what if the company that sponsors your plan goes bankrupt?

As the employees of one small company have learned, it can wreak financial havoc. They’ve gone nearly four years without access to their retirement savings.

It isn’t supposed to be this way. When a company collapses, the assets of its 401(k) are to be transferred to account holders — promptly.

But that’s not what happened at Penn Specialty Chemicals in Memphis. In July 2008, the company sold most of its assets to a French chemicals concern. Its employees — there were fewer than 100 — were given the choice of shifting their retirement plans to the acquirer or keeping them with Vanguard, the fund giant that is the record keeper of Penn Specialty’s 401(k). Many people in the plan, especially those close to retirement, chose the path of least resistance: they stayed with Vanguard.

Then, that December, Penn Specialty filed for Chapter 7 bankruptcy — liquidation. The court appointed George L. Miller, a certified public accountant at Miller Coffey Tate in Philadelphia, as trustee. In these cases, the trustee must advise the Internal Revenue Service why the 401(k) was terminated and await I.R.S. approval that the plan had not run afoul of tax laws.

Such a determination should have been relatively simple in Penn Specialty’s case because, as the I.R.S. manual says, bankruptcy is usually sufficient evidence to support a plan’s termination. In such a circumstance, the I.R.S. says, participants should receive their share of the plan’s assets “as soon as administratively feasible,” or within one year.

The people with 401(k)’s at Penn Specialty haven’t even come close. Although they can switch among various Vanguard funds, they can’t touch their money. While they wait, they’ve had to pay high administrative fees on their accounts. Older account holders could become subject to substantial tax penalties because they can’t take distributions, as required by law. Inability to gain access to their funds has put some of the company’s retirees under significant financial strain.

Records provided by Shankar Iyer, a former senior research associate at Penn Specialty, show $24,000 in administrative services deducted from his 401(k) one year after the company’s bankruptcy filing. That was 2.4 percent of his 401(k) plan. Additional charges for administrative services have been assessed over the years, he said, but they have been smaller, in the hundreds of dollars.

Understandably upset by such fees, as well as being locked out of his account, Mr. Iyer began asking questions. Over nearly three years, he told me, he has called the I.R.S. and complained to the Labor Department, which oversees retirement plans. He said he repeatedly called Tony Ward, the plan’s overseer at its sponsor, Comprehensive Consulting in Melville, N.Y., but didn’t hear back.

Mr. Iyer has also contacted Mr. Miller, the Penn Specialty bankruptcy trustee. He says the trustee told him that he was awaiting approval from the I.R.S. to make distributions. Finally, Mr. Iyer said he asked a pro bono legal group in Michigan, specializing in elder law issues, for help. Their attempts to free up his 401(k) went nowhere. In a July 2010 e-mail exchange with Mr. Miller, the trustee told the group that Mr. Iyer should be patient.

Two years on, Mr. Iyer’s patience is wearing thin. Although he continues to work for the company that took over Penn Specialty, he has medical problems and is eager to retire. But his retirement savings, generated over a long career in the chemical industry, are tied up in his 401(k).

“As long as they keep the accounts from us,” he said, “my wife and I are worried that they can dip into our funds and quietly consume them.”

Mr. Iyer will turn 71 in October, and he is worried about I.R.S. penalties if he is unable to take distributions from his account as required by law. The penalties normally total 50 percent of the required distribution.

Hoping to untangle this 401(k) knot, I called the parties involved. The I.R.S., which Mr. Miller says is responsible for the holdup, declined to answer even general questions about delays in 401(k) distributions from defunct companies. Mr. Ward, of Comprehensive Consulting, did not return my call.

I moved on to Vanguard. What about that $24,000 administrative charge, I asked? Vanguard said the plan’s trustees had ordered the fee deduction and, as record keeper, Vanguard had to comply.

“From our records, neither Mr. Miller nor Mr. Ward has approved any participant distribution requests since taking over administration of the plan,” said John S. Woerth, a Vanguard spokesman, in a statement. “Vanguard does not have the legal authority to distribute any plan assets without their written approval. So, while we can understand the frustration of the participants in the plan, we are bound by the instructions (or lack thereof) of the court-appointed trustees.”

My next call was to Mr. Miller, the trustee. I asked why this was taking so long. He expressed little sympathy for the account holders. He said he had not heard back from the I.R.S. on his request to terminate the company’s 401(k) in the summer of 2009.

“We do everything by the book,” he said. “We filed the paperwork timely, and we’re waiting.” He added that distribution delays like those experienced by Penn Specialty account holders were pervasive among small-company 401(k) plans. “I have at least seven or eight in this status,” he said.

A spokesman at the Labor Department confirmed that its Employee Benefits Security Administration was investigating the Penn Specialty case as part of an enforcement project targeting 401(k) plans whose sponsors have filed for bankruptcy.

The unit investigates whether plan contributions have not been paid, files legal claims to protect plans’ assets and ensures that fiduciaries properly distribute assets to participants when a 401(k) is terminated. For the six months ended March 31, the employee benefits administration generated some $80 million through the enforcement project, the spokesman said, most of it as recoveries to be paid to 401(k) owners.

YOU would hope that all of this waiting is an anomaly, but the discussion with Mr. Miller suggests that it isn’t. It is certainly true that a large majority of 401(k) plans are sponsored by small companies; some 87 percent of plans nationwide have, like Penn Specialty’s, fewer than 100 participants, according to the Labor Department.

For Mr. Iyer, the whole affair hasn’t just frustrated his retirement plans. It has made him wary of 401(k)’s.

“I tell everyone I know, ‘Do not trust this 401(k) at all,’ ” he said.